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Now that we know the pros and cons of both equity and debt financing, let's look at when each type of financing works best for us.
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So we have two choices when we need some
extra capital to expand our businesses.
0:00
How do we choose?
0:04
Let's consider the advantages and
disadvantages together.
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With equity financing, there is a fair
amount of advantages.
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You don't [SOUND] have to pay back the
money.
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This is a big deal.
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You're not taking on the same amount of
risk as if you were borrowing the money.
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Most [SOUND] investors give you the money
with long-term expectations, so
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you can put that money to good use without
worrying about
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generating profit immediately.
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The profits [SOUND] generated with this
money won't go towards paying off a loan,
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another plus.
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You have money in the bank.
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Finally, if your [SOUND] company fails,
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you are in no obligation to pay off a
loan.
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That's a risk the investors take when
giving you their money.
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However, equity financing comes with
strings attached, so to speak.
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[SOUND] The investors will want a piece of
your company and
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a share of the profits in exchange for
money.
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Depending on [SOUND] how much control
you've given away,
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you may have to run decisions, even
routine ones, by your investors.
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[SOUND] Finally, raising equity financing
is by no means easy.
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There's a significant amount of time
involved.
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There's paperwork and
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cost, and you have to take care to find
the right investor for you.
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Then there's debt financing.
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With debt financing, there are no [SOUND]
strings attached.
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The bank or some lending institution
generally wants to know what you plan on
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doing with the money, but they can't say
how you run your business.
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It's a bit [SOUND] more straightforward as
well.
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You know the amount you have to pay back,
including interest, and you can plan for
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that so that your business spends
accordingly.
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Once the money is [SOUND] paid back, the
business relationship ends.
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It all sounds good, but
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unfortunately, [SOUND] the money must be
paid back on time, so
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you will have to generate revenue with the
loan and put a portion of it away.
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Too much [SOUND] equity isn't a bad thing
on paper, but too much debt and
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you will be seen as risky to lend to and
risky to invest in, so
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you have to be careful about how much you
borrow.
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Because [SOUND] you have to pay back the
loan,
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company growth might be limited during
that period.
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And finally, in case of [SOUND]
bankruptcy,
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you can't just walk away from the
situation like you could with equity.
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Lenders can seize your assets and
oftentimes, especially if you're a young
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company, you may have to personally
guarantee and pay back the loan.
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If retaining control of your company is
important to you and
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you are sufficiently sure that you have
the cash flow to repay the loan,
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then debt financing will work best for
you.
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However, if you need the money for
long-term growth and
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need to invest all of it in activities
that won't immediately generate revenue,
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equity financing is probably your best
bet.
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You will have to find a balance of control
versus cash flow that works best for you.
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It's also perfectly okay to use a mixture
of both types of
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financing to field your company.
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